By Jane Meacham, Contributing Editor

Retirement plan trade organizations and advocates, law firms, and other affected parties proposed to the Internal Revenue Service (IRS) an expanded range of circumstances they believe merit review and determination letter judgment by the tax agency. 

But the recent responses to the IRS’ request for comments on its newly narrowed determination letter process may not persuade the agency to accept letter applications for significant design changes, mergers, multiemployer plans, or other circumstances that the stakeholders suggested, according to benefits consulting firm Conduent Inc.

What’s a Determination Letter?

In a determination letter, the IRS rules on a retirement plan’s qualification after reviewing the employer’s plan and other documents and information. A favorable ruling indicates that the plan meets the tax qualification requirements under Code Section 401(a) and the underlying trust document meets the requirements of Code Section 501(a). Although a plan sponsor is not legally required to obtain one, sponsors can generally rely on a determination letter to avoid retroactive disqualification if the IRS subsequently identifies document errors in an audit.

All the IRS changes in recent months to make determination letter reviews more efficient and limited are seen adding to the risks employers face if their unreviewed plans are found to be noncompliant.

Comments Requested in April

In April, in Notice 2018-24, the IRS asked for comments on the potential expansion of the individually designed plan determination letter program for 2019—namely, on what special situations would warrant IRS review.

Recurring themes arose in the comments submitted by employee benefits trade organizations—the ERISA Industry Council (ERIC) (joined by the In-House Benefits Counsel Network [IBCN]), the American Benefits Council (ABC), the American Retirement Association (ARA), the International Foundation of Employee Benefit Plans (IFEBP), and the Advisory Committee on Tax Exempt and Government Entities (ACT). The circumstances believed to warrant determination letter applications included:

• Significant legislative and regulatory changes;
• Significant plan design changes; and
• Mergers and acquisitions.

Several comments also put forth recommendations for alternative approaches.

For example, plan sponsors may need significant plan design changes as their business changes, and if assurance from the IRS about the plan’s ongoing qualification status is no longer available, sponsors might choose to terminate their plans instead of continuing them in an amended form, wrote Marjorie Martin and Julia Zuckerman of Conduent in a July 10 bulletin (download from link).

Among defined benefit (DB) plan design areas traditionally covered by determination letters, respondents to the IRS expressed concern about:

• Conversions to cash balance designs;
• Traditional plan formula changes;
• Amendments to a plan benefit formula that end qualification as a safe harbor formula under nondiscrimination rules, or that are made to comply with any closed-plan relief;
• Lump-sum windows; and
• Restatement to an individually designed plan due to provisions not permitted in a pre-approved plan.

Relative to plan mergers and corporate reorganizations and consolidations, the Conduent bulletin said, commenters requested that trustees and corporate buyers get a mechanism for ensuring that merging plans will not taint the qualification status of the resulting plan. Under the previous determination letter program, in recognition of the complexity of these transactions, the IRS provided longer remedial amendment periods and assurances about retroactive challenges, the Conduent professionals said.

Ideas for Alternative Approaches

Under one suggested approach for obtaining an IRS stamp of approval, the agency would establish or provide official recognition of a third-party certification system to fill the void left when it contracted the determination letter program—an idea that the IRS raised years ago in a 2001 White Paper. The IRS would retain oversight by certifying third parties enlisted to conduct the reviews, and employers would be able to rely on the certification to avoid retroactive disqualification in the case of a subsequent IRS audit.

Letter Rulings

Another idea involved offering private letter rulings (PLRs) to individually designed plans on certain qualification issues when significant regulatory or legislative changes affect a broad range of plans and the qualification requirement hasn’t been addressed by generally applicable IRS guidance or model amendments.

Limited Scope Reviews

With a limited scope process in which a plan sponsor could ask for review of specified changes since the plan’s last determination letter, a sponsor could use a format like Form 5307, “Application for Determination for Adopters of Modified Volume Submitter Plans,” to identify specific changes to be reviewed. The review could be limited to discretionary amendments, or to amendments addressing items listed in the annual Required Amendments List (RAL). The plan’s prior determination letter would continue to cover unchanged plan provisions, in this recommendation.

Set Review Periods

Another alternative approach raised was allowing full determination letter review 10 or 15 years after the last determination letter, or after a set number of amendments (with limits based on a minimum period) — with the review periods staggered to help address IRS workflow

“Given its limited resources available for performing reviews, IRS may embrace the less time-consuming suggestions like reaffirming the ongoing validity of previously issued determination letters,” the Conduent bulletin said. “It is not clear when, or in what form, IRS will issue guidance in response to these comments.”